Investment Highlights

• We maintain our forecasts and fair value (FV) of RM1.04 based on 14x FY22F EPS, which is at 2x multiple premium to its average historical forward PE of 12x to reflect its strong earnings prospects on the reopening of economies. We make no ESG-related adjustment to our FV based on our 3-star rating. Maintain BUY.

• Luxchem’s 1HFY21 results met expectations at 49% of both our full-year forecast and the full-year consensus estimates.

• The group’s 1HFY21 turnover improved by 41% YoY driven by stronger demand and higher prices of chemical products as economies around the world reopened.

• Its core net profit more than doubled, we believe, due to margin expansion stemming from: (1) inventories acquired at low prices prior to the strong recovery in prices of chemical products; and (2) lower finance cost and tax rate.

• On the other hand, Luxchem is taking slightly longer to complete the following corporate exercises first proposed in Dec 2020 due to various movement restrictions:
  1. A private placement of up to 134mil new shares at an indicative issue price of RM0.7243 to raise up to RM97.3mil proceeds; and
  2. An acquisition of a 55% equity stake for RM121mil in Lexis Chemical, Lexis Specialties and Lexis Corporation, which are involved in manufacturing and trading of industrial chemicals and materials for the rubber glove and dipped latex industries. The acquisition comes with a profit guarantee of RM60mil net profit over three financial years ending February 2023.

• Thus far, Luxchem has placed out 101.2mil new shares and raised RM72.6mil. We have already reflected the entire exercises in our forecasts.

• We believe Luxchem has shrugged off the pandemic. The demand for chemical products has recovered as economies reopen. Meanwhile, the structurally higher demand for personal protective equipment such as gloves post-pandemic due to higher hygiene awareness will continue to drive Luxchem’s latex and nitrile processing/compounding businesses that it is growing via capacity expansion and acquisition. We believe Luxchem fits the bill as an attractive reopening play.s

Source: AmInvest Research - 12 Aug 2021